Feature: Smooth Recovery? Don't Bank on It

Smooth recovery? Don’t bank on it

Forecasters expect this to be the worst year for global growth since World War II. Kellogg professors weigh in on the factors behind the economic crisis and the prospects for recovery

To keep up with the purchasing demands of investors, brokers and banks turned to the subprime mortgage market.

According to Hagerty, in certain instances, this risky behavior was encouraged. “There were incentive schemes present in these banks, which didn’t reward people for being really careful,” she says. “If you’re a wild risk-taker, you’re rewarded.”

“There are huge incentives for risk-taking. You get a giant reward if you get a big payoff, but you still get a truncated payoff if you blow it.”

— Professor Kathleen Hagerty

Banks were able to sell these sub-prime mortgages by pooling them with other loans and packaging them into mortgage-backed securities to form a new type of derivative: collateralized debt obligations, or CDOs. In theory, the AAA tranches of CDOs are safe, because it is unlikely that a large fraction of the mortgages in a CDO will default at the same time, explains Rebelo. In reality, many CDOs were the equivalent of “adding water to wine and putting it into new bottles,” he says. Banks that built their portfolios around these derivatives found themselves in trouble when home prices started to fall in all major U.S. markets because it exposed them to massive losses. However, “it was their concentrated portfolio that was the problem, more than the fact that they were trading in derivatives,” says Robert Korajczyk, the Harry G. Guthmann Professor of Finance.

By December 2007, the U.S. was officially in a recession, according to the National Bureau of Economic Research.

Advanced economies, like Japan and the United Kingdom, and countries with close connections to the U.S. through product and capital markets, felt the impact most immediately and most severely, according to the IMF. The emerging and developing economies soon followed, although those with

By Rachel Fa rr e l l 30 Kellogg Spring 2009

kellogg.northwestern.edu/kwo

Kellogg Spring 2009 31

Photo ©Evanston Photographic Studios

O

n Jan. 28, 2009, the global economy reached a new low.

The International Monetary Fund (IMF) reported that it had overestimated world growth for 2009. Growth was no longer projected at 2.2 percent, the rate the organization had anticipated in November 2008. Now, the IMF said, world growth was expected to be only 0.5 percent — the lowest rate in 60 years.

During a press briefing that afternoon, IMF Chief Economist Olivier Blanchard didn’t mince words. “We now expect the global economy to come to a virtual halt,” he said.

The world economy was once a robust financial system.

What went wrong, and why?

Many people, including some Kellogg School professors, point fingers at the U.S. “The U.S. is the driver of global demand,” says Kathleen Hagerty, the First Chicago Distinguished Professor of Finance and senior associate dean of faculty and research. “So if something happens to the U.S., it has a huge effect on China and India [and other countries].

When one guy goes down, everyone goes down.”

The downward spiral, some professors say, can be traced to 2001. Shortly after the terrorist attacks of Sept. 11, Federal Reserve Chairman Alan Greenspan lowered the overnight interest rate to 1.75 percent to mitigate the effects of a mild recession. “Many people think that these low interest rates played a key role in the current crisis,” says Sergio Rebelo, the Tokai Bank Professor of Finance, “because they fueled a rise in the demand for housing, which led to a substantial appreciation in home prices.”

The housing bubble allowed investors to receive high returns on mortgage-backed securities, because “as mortgage credit expanded and home prices increased, mortgage default rates fell,” says Rebelo. Even those facing foreclosure were able to take out a home equity line of credit or sell their homes for a profit, since home values were rising so quickly. “That made banks feel that it was safe to continue to increase their real estate exposure,” Rebelo says.

Photo ©Evanston Photographic Studios

“Can you imagine the situation we’d be in now if we put the Social Security trust fund in the market?”

— Professor Mitchell Petersen

weaker connections to the U.S. (such as some African countries) weren’t affected as quickly. “The lack of connections is good when things go bad and not so good when things go well,” explains Mitchell Petersen, the Glen Vasel Professor of Finance. “Africa may be most immune to [the global recession] just because they tend to have the smallest connections to the rest of the world.”

This year, the IMF predicts that advanced economies will post negative growth (around -2 percent), emerging and developing economies will fall by 3.3 percent, and world trade volume of goods and services will drop by 2.8 percent.

As bad as those numbers sound, it could be a lot worse. Since mortgage-backed securities and CDOs were sold to investors outside the U.S., many countries shared a piece of the toxic pie when assets fell — which lessened the blow for everyone, says Petersen. “You want these losses spread out so that you won’t have the [U.S] banking system fail,” he explains, because that would have been catastrophic on a global level.

It may also indicate that the U.S. is not entirely responsible for the worldwide economic meltdown. “I would say that excessive risk-taking had gotten more out of hand in the U.S. than other places,” says Deborah Lucas, the Donald C. Clark/ HSBC Professor in Consumer Finance. “But in Western Europe, there were similar kinds of irrational exuberance about housing markets and credit markets generally. There was an unprecedented worldwide bubble in asset prices — and then it all came crashing down.”

An academic stimulus plan Many Northwestern University professors say they are “cautiously optimistic” about President Barack Obama’s economic stimulus plan — in part because there is no way to predict how effective it will be. “The honest truth is it’s not clear that it’s going to work,” says Martin Eichenbaum, the Ethel and John Lindgren Professor of Economics. “The scientific evidence for it is at best mixed. Maybe we do want to extend unemployment benefits and help the states support people during tough times.

But we don’t want to say, ‘Here’s a shovel, here’s a bucket, go fill up [that hole]’ and think, ‘Poof, that’s going to fix everything.’”

Besides the stimulus plan, other changes to the U.S. financial system would help prevent another global crisis of this magnitude, professors say. Hagerty stresses that banks’ compensation structure needs modification, since the current system encourages investors to engage in aggressive risk-taking. “There are huge incentives for risk-taking,” she says. “You get a giant reward if you get a big payoff [on an investment],

32 Kellogg Spring 2009

but you still get a truncated payoff if you blow it.” Investors would be more selective with purchasing assets — and perhaps steer clear of securities like CDOs — if there were consequences for making bad investment decisions, she says.

Investors also need to be reminded of the classic rules of investment. “One of the things that we always teach at Kellogg is, whenever you see a really good investment opportunity, entertain the possibility that you’re missing something,” Petersen says. “In many cases, you’ll find that there’s something you’re missing.” For instance, there may be a risk factor to which the security is exposed. Or, there’s a reason why an asset pays a high return: it’s a risky investment. “If everybody could make more money in stocks and there was no negative, everyone would have all of their money in the stock market,” says Petersen. “The stock market is great because it gives you a high expected return, but it’s terrible because it’s a lot riskier.

Can you imagine the situation we’d be in now if we put the Social Security trust fund in the market?”

Increasing transparency in bank transactions and improving accounting techniques — such as methods for valuing assets — would also help strengthen the U.S. financial system.

The current system allows banks to “conceal or hide or make obscure what they’re doing,” Hagerty explains. This gives bankers the freedom to do whatever is necessary to earn big bonuses, including providing unrealistically high valuations of assets.

“People need to be responsible for their own actions. That means that we have a responsibility to educate them.”

— Professor Martin Eichenbaum

Regulating the banks, however, may not be the correct solution. Typically, regulations aren’t effective at controlling banks’ bad behavior because banks find ways to maneuver around the rules, says Eichenbaum. For example, a bank might become a financial institution that doesn’t fit into the category of a bank — and thus evade bank rules — or find ways to take items off a balance sheet. “Members of the banking institutions will leave, start their own firms and try to do some of those prohibitive transactions,” says Petersen. When considering regulations, “think not just about the problem you’re solving but about the incentives you’re establishing for others to go around the system.” In addition, consider that regulations can be more harmful than helpful, particularly when they prevent useful financial transactions.

On a global level, regulating banks is not realistic, Lucas says. No existing international organization is capable of enforcing regulations, and “it’s unlikely that there will be one,” she says. “Countries have no intention of abiding by international authorities. There’s value in international cooperation, but it has to be done by agreement and example.” Creating

Scholarly opinion The Obama stimulus package: Boom or bust?

Politicians have made their opinions known about President Barack Obama’s $787 billion economic stimulus package. For an academic perspective, Kellogg World turned to Mitchell Petersen, the Glen Vasel Professor of Finance at the Kellogg School. The finance and economics expert researches empirical corporate finance and how firms evaluate and fund potential investment projects.

Kellogg World: What are your first impressions of the economic stimulus plan?

Prof. Mitchell Petersen: Part of [the plan is driven by] psychology and part of it is economics. In the depths of the Great Depression, FDR made speeches that were light on economic specifics and heavy on psychology. He realized that psychology does influence the economy. If you’re optimistic and feel good about tomorrow, you’re more likely to invest, more likely to work, more likely to make sacrifices today for the future. If you’re very scared about the future, you’re going to save more, you’re going to consume less and most importantly, you’re not necessarily going to invest for the future.

KW: What changes could improve the stimulus package?

MP: I think for the markets to be comfortable with the stimulus, two things need to happen. One, there needs to be a clear articulation of what we’re trying to accomplish. And it can’t be [something as general as] “We’re trying to get the economy going,” or “We’re trying to solve the banking crisis.” [The government] needs to articulate the fundamental problem with the banking crisis or the economy, and explain how this stimulus is going to fix it. Two, it would be nice to have some benchmarks for how we’re going to evaluate progress.

regulations that would translate on a global scale would also be very difficult and complicated, since every country has a different financial system that frequently changes. “And in the end, I think every country is going to pursue its own interests,” says Eichenbaum. “Maybe in a perfect world where people weren’t selfish that would work, but that’s not the world we live in.”

In terms of international trade, Eichenbaum warns that the “buy American” mentality is dangerous. “There’s always temptation to build a big fence around our borders — but that would be catastrophic,” he says. “People love to emphasize that when we import goods, some Americans lose their jobs. But remember, a lot of American jobs are tied to the import sector, and there are huge benefits to those imports.” The sneakers made in China are 30 percent cheaper than those made in the U.S., he notes, “so if you’re a single mom, you can [afford] sneakers for your kids.”

kellogg.northwestern.edu/kwo

KW: Why is it so difficult to predict how effective this stimulus package will be?

MP: If we borrow money [to spend], that means we’re going to have to cut spending or increase taxes next year [or at some future date]. If I tell you I’m going to give you $1 today, and I’m going to tax you $1.05 next year, how do you change your spending? Some people will say, “I’m not going to increase my spending at all; I’m going to put that dollar in the bank and save it for the $1.05 I’ll owe next year.” In that case, government spending has no effect. For the spending to have an effect, we need people to not think too much about that future tax liability. They need to believe that they received a dollar for free, and that they can go spend it. It’s incredibly difficult academically and in practice to estimate [how people will spend], since we must compare what did happen to what would have occurred had there been no increase in government spending.

We can’t measure the other reality that did not occur.

KW: In what areas should the government invest?

MP: The answer is the same as I give my class. Invest in projects whose future value exceeds the cost of the capital. Driving around, it seems like we have a lot of potholes. So [infrastructure] seems like an investment which needs to be done anyway. The issue I worry about is if you ramp up spending in a small sector of the economy very quickly, supply curves are very steep. It’s difficult to get enough equipment and capacity and labor into small sectors of the economy quickly.

So what often happens is you essentially increase the price of all those inputs, and you don’t see a large increase in quantity. Education is another area to consider. In the last two decades, we’ve said that our schools are in desperate need of capital. If we’re going to spend money somewhere, maybe that’s where we should spend it — not just to get the economy going, but as a long-term investment. — RF

Eichenbaum adds that consumers need to be a part of the solution as well. To avert another sub-prime mortgage crisis, people need to be educated and taught that they shouldn’t take on loans they can’t afford. “People need to be responsible for their own actions,” he says. “That means that we have a responsibility to educate them. It’s appalling that people don’t know, for instance, the terms of their mortgages or whether there’s a penalty for pre-payment.” He also suggests that the government develop standardized mortgage forms to avoid credit-loosening practices.

As devastating as the global recession is, it may be the wake-up call that the world needed. “This has been a lesson for people in that they can’t ignore risk,” says Lucas. “We’re not in an era that is beyond business cycles. People need to be brought to their senses.”

Kellogg Spring 2009 33

Beating the odds Not everyone is hurting from the recession.

These Kellogg alumni are running profitable firms that are on track for growth this year

By Rachel Farr el l

S

cott Fearon ’83 didn’t know that CDOs were going to turn toxic in 2008. But he did know better than to touch them with a 10-foot pole.

“It’s the same old story throughout the generations,” says Fearon, the president of Crown Capital Management, a Marin County, Calif.-based hedge fund firm. “People have lost money when they were reaching for yield or investing with people or in stocks that they weren’t that knowledgeable about.”

Fearon is one of several Kellogg alumni whose businesses are performing well this year. They explain how their firms have managed to thrive despite a down economy.

A client-centric approach Of all the industries at risk for bankruptcy in this economy, banking is certainly at the top. But if you’re going to work in banking, Northern Trust Corporation isn’t a bad place to be.

That’s not to say that Northern Trust hasn’t paid the consequences of the market conditions (its net operating earnings dropped 22 percent between 2007 and 2008), but it is in a better position than most of its peers. In 2008, Northern Trust had “a very good year when most banks were not making any money — in fact, losing a lot of money,” says William A. Osborn ’73, chairman and director of Northern Trust Corporation. “And our earnings power and business and asset quality is extraordinary, compared to the rest of the industry.”

Osborn says that the bank has increased its loans by 20 percent this year, and its $30 billion portfolio has only $100 million in non-performing assets, “which is quite unusual,” he explains.

According to the Northern Trust Web site, as of Dec. 31, 2008, the bank had $82 billion in banking assets, $3 trillion in assets under custody, and $575.5 billion in assets under management.

Like Crown Capital Management, Northern Trust “has a very focused business strategy,” Osborn says. The bank specializes in investment management, asset fund administration, and fiduciary and banking solutions for corporations, institutions and affluent individuals worldwide. In addition, the

Slow and steady wins the race

34 Kellogg Spring 2009

Above right: An emphasis on customer-centricity has helped Northern Trust Corporation cope with the economic downturn, says William Osborn ’73, chairman and director of the bank.

Photo ©Sam Willard

Unlike many hedge funds, Crown Capital Management was up 1.7 percent last year, and has delivered positive annual returns for 18 consecutive years. But Fearon says he hasn’t changed CCM’s portfolio, which includes 100 short investments and 30 to 50 long investments in publicly traded companies. In fact, he stopped taking new investors more than 10 years ago, yet still manages $220 million for 90 different investors today.

Fearon is confident that this strategy will keep his company in a good position, regardless of the market conditions.

“I’m a traditional hedge fund, and that means I own stocks and short different company stocks,” he explains. “So even if the whole system comes tumbling down — meaning, if the GDP were to get to -8 or -9 [percent] in the first half of 2009 — I honestly believe that I would make so much money on my short investments that it would offset what happens in my long investments, and I would have another up year.”

Fearon was never tempted to invest in the mortgagebacked securities that other investors couldn’t seem to get enough of. Instead, he has always stuck with what he knows best: “the poorly analyzed, poorly followed smaller companies’ stocks,” he says. That is, “companies with market caps below $2 million, or with annual revenues below $1 billion that have little to no coverage by Wall Street analysts. I never invest in S&P 500 companies.”

Robert Korajczyk, the Harry G. Guthmann Professor of Finance, praises Fearon for his investment practices. “There are a lot of funds that, when the cost of leverage has gone down and volatility has been low, really exposed themselves to the possibility that they could lose a lot of money when things change,” says Korajczyk. “Scott has structured his portfolio to avoid that kind of problem.”

Fearon knows his strategy has caused CCM’s growth to be slower than that of some hedge funds. “But measured growth makes a lot more sense than runaway growth,” he says. “Hey, could I have grown this thing into a firm with 30 to 40 employees? Very possibly. Would I have gotten a lot more money for myself? You betcha. But would I have been pushed beyond my expertise? Absolutely. ”

Left: Scott Fearon ’83, president of Crown Capital Management, says that sticking to “poorly analyzed, poorly followed smaller companies’ stocks” has helped his hedge fund deliver positive annual returns for 18 years in a row.

kellogg.northwestern.edu/kwo

Photo ©Charlie Westerman

bank never got involved in subprime mortgage lending, or any other high-risk investments for that matter. “We’re very conservative with the management of our own risk and balance sheet,” he says. “We haven’t gone into a lot of the higher-risk securities to try to get yields like many other banks did.”

Despite Northern Trust’s size, Osborn makes an effort to get to know his employees and clients throughout the U.S. and abroad. He spends about 50 percent of his time visiting clients and prospects so that he can develop an intimate understanding of their needs. “You can have market studies and consultants, but there’s nothing better than first-hand knowledge of your clients’ businesses,” Osborn explains. “It helps make certain that you are working on helping your clients for the future. And if your clients do well, you’ll do well.”

Kellogg Spring 2009 35

Critical reading

Kellogg Professor Philip Kotler’s new book aims to help marketers survive tumultuous times

“Everything we do [helps] build revenue and save dollars over time – which in this economy is more relevant than ever,” says Mark Shapiro ’80, president and CEO of Gladson Interactive.

Philip Kotler, the S.C. Johnson & Son Professor of International Marketing at the Kellogg School, has partnered with global business expert John A. Caslione to write a new book — and it couldn’t be more timely. Chaotics: The Business of Managing and Marketing in the Age of Turbulence (AMACOM, 2009), outlines a survival plan for marketers in the current economic climate.

In a chapter entitled “Designing Marketing Systems for Resilience,” the co-authors explain that addressing the following five questions will help leaders determine how to reduce and reallocate their marketing budgets.

2

Do your investments change your customers’ buying behavior?

Share of market and revenue goals are too general to be true barometers of effectiveness. It’s more important to know what specific behaviors you are trying to drive among specific segments of customers. For one customer segment, it may be driving an annual versus biannual service package upgrade; for another, it may be to motivate them to buy 50 percent more each time they order. By identifying growth-generating behaviors, you can judge your marketing investments by their ability to drive those behaviors.

1

3

Are your investments focused on customers’ barriers to buying your brand? Try to understand the barriers to buying and choose the marketing vehicles and messages that will overcome these barriers. For example, one high-market-share company spent heavily on mass advertising to build awareness — efficient if examining the cost divided by the number of prospects. But the brand was already well known. A better course would be to spend money on closing the sale — a shift that actually could significantly increase growth. Conversely, a low-market-share company first needs to bump up awareness and consideration to higher levels, and here mass advertising works best.

4

Do you have the right mix of marketing levers among your investments? All marketing investments do at least one of three things: 1) Change customer perceptions to encourage them to buy more; 2) Provide temporary monetary incentives for customers to buy more; 3) Make the brand more available so customers can buy more. Focusing too heavily on any one lever can hurt the others. Instead, thinking has to shift to better weigh the right mix of investments to generate profitable growth.

5

Do you have a system to maintain “winners” and cut “losers”? As you assess your winning and losing investments, it’s critical to think about both the potential long-term and short-term impacts of those decisions. Four considerations should guide this evaluation: 1) effectiveness and efficiency; 2) maintenance versus growth; 3) proven versus experimental; 4) direct and indirect impact.

Do you have a complete inventory of your growth investments and can you identify waste (or inefficient spending)? Periodically taking an investment inventory will reveal wasteful spending of as much as 15 percent of the total almost every time, along with proven winners that must be supported no matter how much the budget must be reduced. A thorough inventory identifies obvious wastes and clear producers, as well as spending areas that pose bottom-line opportunities for more efficient and effective spending.

Photo ©Dan Dry

Value-added service Gladson Interactive is in the right place at the right time. The Lisle, Ill.-based provider of label contents and digital product images services an industry that is in a good position right now: consumer goods manufacturers and retailers, which include drug stores such as CVS, grocery chains like Safeway and manufacturers such as Procter & Gamble. Even better, the company provides a service that’s vital to its customers’ success. It supplies product data, which helps retailers determine how their shelf space is allocated and managed, and provides product photos and information, which retailers use on their Web sites.

These services are particularly important for companies during a recession, explains Mark Shapiro ’80, president and CEO of Gladson Interactive. “They need our data in order to respond quickly to changing conditions,” he says. In fact, when pitching a new client, Shapiro has data to prove that Gladson’s services deliver a substantial return on investment.

“[We show them] ‘Here’s how our services help you sell more or spend less,’” says Shapiro. “So everything we do [helps] build revenue and save dollars over time — which in this economy is more relevant than ever.”

As companies reevaluate their marketing spend, more are turning to the expertise of firms like Gladson Interactive, Korajczyk says. This is “a growing area,” he notes. “People want to make sure that, if they’re spending money on resources, they’re spending it wisely.”

Gladson Interactive performed well in the second half in 2008 and today is “on plan and well ahead of a year ago,” Shapiro says. But he isn’t getting overly confident. “This is the most volatile, uncertain environment I’ve ever seen,” he says.

“We are planning for the worst and hoping for the best.”

Philip Kotler, the S.C. Johnson & Son Professor of International Marketing, offers five key questions in Chaotics to help business leaders prioritize their marketing budgets.

Adapted from Chaotics: The Business of Managing and Marketing in the Age of Turbulence © 2009 Philip Kotler and John Caslione All rights reserved.

Published by AMACOM Books www.amacombooks.org A Division of the American Management Association

Photo ©Nathan Mandell

36 Kellogg Spring 2009

kellogg.northwestern.edu/kwo

Kellogg Spring 2009 37

makes cents Think your firm can’t afford marketing?

Think again.

Kellogg faculty say that companies can’t afford not to market during these economic times. Here’s how to stretch your marketing dollars and make the most of the meltdown

E

arlier this year, FedEx did something it hadn’t done in 12 years: It opted out of Super Bowl advertising.

In light of the economic downturn, other firms are following FedEx’s lead and slashing their marketing budgets.

But is this wise?

In a word, no, says Tim Calkins, clinical professor of marketing at the Kellogg School. “Marketing becomes more important in a downturn — not less important,” he explains.

“Some people think that marketing is optional, something that you do when you have enough money to pay for it. That’s a very dangerous line of thought, because marketing, at the core, is all about building a strong business.”

In fact, Calkins says, a recession is an optimal time for firms to increase their spending on marketing, because many companies will do just the opposite. But it’s important for businesses to adopt the right marketing mix. Calkins and his Kellogg colleagues offer advice on how firms should address the Four P’s if they want to ride out the economic storm — and overtake their biggest competitors.

PRODUCT

“Firms have to be really careful about fighting games that they don’t win.

Don’t try to say that you’re the cheapest when there’s a cheaper option.”

— Professor Julie Hennessy

38 Kellogg Spring 2009

Launch a sub-brand that stresses value: It’s never smart to cut back on the quality of a product or service as a means to save money. But firms may want to consider launching a sub-brand or value brand. “The strong players can launch a sub-brand or a value brand without necessarily [hurting] their main brands,” says Lakshman Krishnamurthi, the A. Montgomery Ward Professor of Marketing. “Customers are going to spend money, but they want to spend it wisely.” As an example, shortly after the 1987 stock market crash, luxury

designer Donna Karan introduced its “Donna Karan New York” or “DKNY” line. Similarly, Vera Wang launched a value brand, “Simply Vera,” at Kohl’s recently, and Whole Foods is pushing its “365 Everyday Value” brand. But Calkins warns, “This can erode the brand long-term.”

Evaluate product lines and eliminate under-performing brands: When times are good, companies expand their product lines. “And then, after a while, they have no idea why they have so many products,” says Krishnamurthi. “I mean, do you need 80 SKUs of toothpaste? Why?” The pruning of brands has to happen, Krishnamurthi says. It will eliminate a firm’s excess costs and return the focus to its more successful, tried-and-true brands.

Don’t stop innovation — if you can budget for it: If you can afford to launch a new product, “downturns are wonderful times to do it,” says Calkins. “But protecting the core has to be the top priority. Not launching some new great innovative product is, to me, more likely to be a missed opportunity than a dangerous thing to do.” Krishnamurthi argues that if you want to be top dog, you have to take a more aggressive stance. “Innovation should never stop,” he says. “If you want to be a great company — during a recession period or not — you have to be on the forefront. You have to be better than the other company.”

PRICING If you can win the price game, then play: Companies such as McDonald’s can slash prices and customers will take notice. But cutting prices doesn’t work for some firms, such as Target, which doesn’t offer lower prices than competitors like Wal-Mart. “You don’t want to be in a price war with Wal-Mart,” advises Julie Hennessy, clinical professor of marketing.

“Firms have to be really careful about fighting games that they don’t win. Don’t try to say that you’re the cheapest when there’s a cheaper option.” In addition, price cuts should be modest, just enough to send the message to consumers “that we are here for you and understand that you’re hurting and want to do our part to help you,” says Krishnamurthi. “If you [cut prices too much], once the recession is over you could have a lower price image.”

If you can’t win on price, talk value: Products and services that cost more than their competitors should stress value over price. This is an especially smart strategy for luxury brands.

Diamond company DeBeers, for example, stresses its value with the tag line, “Fewer better things.” “In a way, I think it’s a wonderful message for this environment,” says Calkins. “It says that, relative to where you put your money these days, diamonds are a smart place to go.” But Krishnamurthi points out that talking value isn’t always enough. “If everyone is saying value, how do you differentiate yourself?” he argues.

“You have to give customers more than that. There has to be a reason why, among five value offers, I should buy your product as opposed to someone else’s.”

kellogg.northwestern.edu/kwo

“Some people think that marketing is optional, something that you do when you have enough money to pay for it. That’s a very dangerous line of thought, because marketing, at the core, is all about building a strong business.”

— Professor Tim Calkins

PLACE Support distributors that you value: Professor of Marketing Anne Coughlan emphasizes the importance of evaluating your list of distributors. Figure out which ones you value the most, and then “make sure you do what you can financially to make them successful throughout the downturn so that they’re there for you,” she says.

Fire your “customer”: On the flip side, customers, partners or buyers that hurt you financially need to be eliminated from your distribution channel. “There’s an expression, ‘Fire your customer,’” says Coughlan. “There are some customers or partners that, if they’re very demanding, are actually money-losers for you. Get rid of them. You can’t afford that right now.”

PROMOTION Play into cultural shifts: Spending less and saving money is now the smart and responsible thing to do. “Just months ago, it was cooler to spend a lot and have new things,” says Hennessy.

“And day by day and week by week, it’s become cooler and cooler to be prudent. There’s a shift in attitude.” Use that attitude shift in your promotional efforts, like Target does in its commercial, “Brand New Day.” The commercial boasts that the “new” way of living is substituting luxuries with lower-cost, do-it-yourself options — such as painting your own toenails with $3.99 polish instead of getting a pricey pedicure. This strategy also worked during the Great Depression. According to the New York Times, Sears’ 1930 catalog used phrases such as “Be smart and thrifty” and “Look at the chic economy.”

Be consistent with your brand image: Playing into these cultural shifts only works if it’s consistent with your brand image. Otherwise, it can be dangerous to do. “You don’t want to totally modify and reposition your brand with every up-anddown of the economic winds,” says Calkins. “Because then you’re going to lose track of your brand and end up with a very weak brand.”

Most importantly, connect with your customer: Figure out what makes your customer tick — and then find a way to connect with them. “Great marketers find a way to connect with people,” says Calkins. “When marketers have a message that connects with what consumers are feeling at a particular point in time, that’s really magical.”

Kellogg Spring 2009 39

Faculty Photos ©Evanston Photographic Studios

Marketing

By Rac h el Farre ll